WE SPOT THE BULL IN THE BEAR

Price to book value nos could help you in crisis

2008-10-28T12:58:00.000+05:30

What is a good yardstick for an undervalued stocks in times of crisis such as the current one? The answer to that, many market watchers say,

is price to book value(P/BV). Book value is the measure that each shareholder stands to get, were the company to be liquidated.

Conventional wisdom suggests that there is very little chance of going wrong if an investor were to put his money in a stock with a P/BV of less than one. Already 21 stocks in the BSE-100 index have seen their price to book value fall below one, as a result of the unprecedented erosion in their stock prices.

Stocks that fall into this category include PSU oil marketing companies like HPCL and IOC, and metal stocks like Tata Steel, Hindalco and JSW Steel.

In the case of oil marketing companies, the recent softening of crude oil prices has not helped much. For one, they are still holding inventory purchased at very high prices. Also, these companies also have refining divisions, which are the major contributors to their profitability. Gross refining margins have fallen sharply in line with the slide in regional refining margins, and is likely to weigh on earnings.

In the case of metal stocks, investors are concerned that a global economic slowdown over the next few quarters could adversely hit demand for commodities in general.

Similarly, investor concerns for the growth prospects of the real estate, cement and construction sector over the medium term has resulted in scrips like Grasim Industries and IVRCL Infrastructure & Projects quoting at a price to book value of less than one. At Monday’s close of 4343.2, the broader BSE-100 index trades at a P/BV of 2.06 times.

Says Ramdeo Aggrawal, managing director, Motilal Oswal Financial Services, “Investors would need to look at the fundamentals of each sector over the medium term where stocks are trading at a price to book value of less than one, and decide if there are growth possibilities at the current stock prices.”

Adds Anuj Choksey, co-head, institutional equities, KR Choksey Shares and Securities, “Valuations of metals shares and those connected to the construction sector are trading at ridiculously low levels as investors are assigning pessimistic valuations at the first signs of a slowdown.”

Meanwhile, the Sensex went below 8,000 intra-day on Monday, as there was no let-up in the selling fury that has gripped Dalal Street over the last couple of weeks. This has been a hallmark of emerging markets in general. So how does India compare with them? At Monday's close, the Sensex is trading about 9.5 times trailing 12-month earnings.

In contrast, other indices like the Shanghai Composite Index ended at 1,723 on Monday trade at a P/E of 13.35 times, while the Brazilian Bovespa at Friday's close of 31,481 is trading about 7.5 times. Of course, the Russian stock market index, the Russian RTS Index which has lost nearly 70% since its peak over the last few weeks, trades at an abysmal P/E of 3 times.

source:-www.economictimes.com

ANURAG DUJARI
Mobile - 09831909904
E-Mail - anurag130@yahoo.com
Yahoo Messenger ID - anurag130
Blog - www.investmentcalls.blogspot.com

PE ratios of blue-chips at historic low

2008-10-28T12:29:00.001+05:30

The stock market is in turmoil and share prices of most companies are tumbling as if there is no tomorrow. In the last nine months, things seem to have moved from irrational exuberance to irrational pessimism . Nothing illustrates this better than the level of share prices relative to their underlying earnings.

This ratio is what in market jargon is referred to as the price-earnings (P/E) multiple. In essence, the P/E ratio of a share tells you how many rupees you have to pay for every rupee worth of net profit of the company. Thus, if a company has one crore shares and a net profit of Rs 100 crore, each share commands a profit of Rs 100. If you have to pay Rs 200 per share, the P/E ratio is 2. In other words, for every two rupees you invest, your effective return is one rupee per year.

Of course, you might actually get in hand only a part of this since only the part of profits that is distributed as dividends is handed over to the investor, but even the rest is reinvested in the company, thus adding to the value of your share. It should be clear that this is a fantastic rate of return, considering that to earn one rupee a year from a bank fixed deposit you would need to invest about Rs 10.

Today, share prices have fallen so much that in many cases, the P/E ratio is down to 2 or even lower. That means if you are investing Rs 100 to buy a share of such a company, your investment will earn Rs 50 or even more in one year.

For those who are skeptical about whether the reinvested portion of profits really helps them, here’s the opinion of Warren Buffet, one of the world’s richest men and widely regarded as among the most savvy investors. Buffett believes companies that reinvest the entire amount back are a better bet to put your money in. He has argued that you buy a share because it gives you betters return than investment in other instruments.

If a company is growing, it will need to invest in the future and hence distribute little or nothing as dividend . Such a company is actually enhancing your returns for the future. On the other hand, a company that gives back the entire earning in the form of dividend is effectively telling you it cannot find anything to do with the money , which means it is unlikely to grow and hence likely to yield low returns in future.

On average, good companies with a healthy future tend to earn returns of around 20% on their total investment as against a return on bank deposits

of around 10%.

In normal times, P/E ratios of blue chip companies would of the order of 20, though in cases where future earnings are expected to be much higher you could have correspondingly higher P/E. (Of course, it varies from industry to industry, which is why it makes more sense to compare P/Es of companies within a certain industry rather than across industries.)

That brings us back to the abnormally low P/E ratios for several blue chips in the Indian market today (see chart). Take the example of Hindalco Industries. Its annualized net profit on the basis of its first quarter result for 2008-09 would be Rs 2,787 crore. It has 122.65 crore shares. Therefore, every share of the company has an underlying profit Rs 22.64. But a Hindalco share could be bought on Monday for just Rs 40.40. That means, an investment of Rs 40.40 could earn a net profit of Rs 22.64 in one year, a P/E ratio of 1.78. That’s an annual rate of return of over 56%.

Similarly, Tata Steel’s P/E ratio of 2.11 at Monday’s closing price means buying the share gives you an annualized return of over 47%. Including these two, there are at the moment seven Sensex scrips that are trading at P/E multiples of less than 5. In other words, the underlying return on investments in these scrips would be over 20% per annum. Of course, there is a caveat to be added here. These calculations are all assuming that results declared so far are a good indicator of annualized earnings . If earnings in the remaining quarters do not match up to what was achieved in the first quarter, then P/E multiples would be higher even at the same share prices.

Even if the P/E multiples rise to say 10, it would make sense to invest provided the company is growing in the long run. After all, when you invest in equity you are looking not only at returns from earnings, but also at potential capital appreciation.

source:www.economictimes.com

ANURAG DUJARI
Mobile - 09831909904
E-Mail - anurag130@yahoo.com
Yahoo Messenger ID - anurag130
Blog - www.investmentcalls.blogspot.com

Don't miss the bus, invest now

2008-10-26T17:52:00.000+05:30

Last chance? Really? This was the reaction of people over the last weekend since the Sensex slipped under the 10,000-mark. Investors are pressing the panic button and getting ready to bail out. There is talk of a further fall being splashed over all the television channels. Even analysts are painting a gloomy picture and advising investors to wait on the sidelines. In fact, a fund manager of one of the largest domestic mutual fund was advising a cautious approach. So, is it really the last chance to buy? Are the experts on TV wrong?

Target audience

The target audience for TV channels (and the advertisers) is the active traders lot which contributes to the Rs 60,000 crores volume on the stock exchanges everyday. The entire effort is focused on finding out where the markets are likely to go the next day. This dilutes their focus from the underlying fundamentals and what all the experts and TV channels are trying to do is pick the bottom. Everyone is trying to time the market. Not a bad idea. Except that one is yet to meet anyone who has done that.

The experts said recently that timing the market was a futile exercise. We were told stories of Warren Buffet and long-term investing, and that equity is the best vehicle and option for the long-term. What has changed so drastically that the long-term prospects are spoiled? And there is no mention of Buffett nowadays.

Wrong picture

The long-term prospects were never as good as the analysts were painting it out to be at the 20,000 levels. But now things are not as bad as many are projecting it to be. The problem with most analysts and a large section of the media is the tendency to take the recent trend and project it into the future. We saw this effect in January.

"Markets rallied from 15,000 to 21,000. India is doing well. We will rally till 25,000." We also saw this effect in the mid-year with oil. "It rallied from $70 to $140. There is no oil available and it will touch $200 soon."

Reverse logic

The same logic is in reverse today. "Markets have crashed. India is facing difficult times. So, we will continue to slide further." But, is India set for a rough ride? There will be many corporates who will reel under the liquidity crunch being faced now. The days of really easy credit are over and many corporates, who had embarked on excessive and aggressive expansions and acquisitions, will be squeezed by the credit crunch.

Political considerations (like the fear of inflation in an election year) have put economic growth priorities on the backburner. India Inc is paying the price for this and the current pessimism about the negative impact is justified.

But this analysis misses a key point. Most of India's troubles are domestic in nature, caused largely by the Reserve Bank of India's (RBI) tightening cycle. This gives us the ability to resolve our issues domestically when the RBI reverses the tightening cycle. With the recent cash reserve ratio (CRR) cuts and the expected rate cuts in the credit policy, the RBI has already begun the loosening cycle.

Inflation eases

Inflation has dropped below 12 per cent and should drop below 10 per cent in the next two months. Commodity prices have dropped sharply across the world providing relief from the inflation threat. The long-term rates are already indicated lower by the debt market in India. The government securities are quoting at a 10-year yield of 7.68 per cent, as against a peak of 9.4 per cent just three months ago - a drop of more than 170 bps.

Thus, India's growth should be back on track over the next six months. The sharp fall in oil and commodity prices will reduce the current account deficit being run up. The fiscal deficit will also be sharply lower than feared as the oil and fertiliser subsidies will come in closer to the budgeted numbers.

Sensex's valuation

Against this backdrop, the recent fall has made the Sensex cheap by historical valuations and is trading at under times forward earnings. Even factoring in a moderate drop in expected earnings due to a slowdown, the Sensex will still be available at 10.5 times.

The drop in markets is temporary as valuations are very attractive and markets will revert back to mean valuations. As India's growth reappears on the horizon and the global situation stabilises, FIIs will buy again.

Rallies will be weak and markets could keep falling. But it is unlikely there will be serious damage from these levels. Investors looking to build long-term portfolios should heed Warren Buffet's advice - be fearful when others are greedy (think of Sensex at 21,000 level) and be greedy when others are fearful (how about right now?).

source:- www.economictimes.com

Anurag Dujari
Mobile - 09831909904
Messenger ID - anurag130
E-MAIL - anurag130@yahoo.com
Blog - investmentcalls.blogspot.com